Banking 2020: Smartphones Rule

But perhaps even more so than those other types of technology, the smartphone will force bankers to think long and hard about what the branch of the future should look like, according to a new report from the Lafferty Group, a London-based financial services consulting firm.

Titled "Retail Bank 2020: A Roadmap for the Future," the report says that by the end of the decade, the smartphone will not only be the channel of choice for transferring funds, opening accounts and applying for loans, it'll also replace plastic cards as the primary payments vehicle.

For banks, perhaps the key takeaway is that branch traffic will drop off substantially over the next decade. The report's author, Jerome Svigals, says that if banks don't start preparing for this shift soon they risk being stuck with too much real estate and too many employees with too little to do.

"Banks have got to start thinking ahead for this transition period," says Svigals, a longtime industry consultant best known for inventing the magnetic stripe card. "If they don't, they are going to be left with a set-up that will not be useful in this new environment."

Today, roughly 35 percent of bank transactions still take place at teller stations, and Svigals predicts that number will drop to 15 percent by the end of the decade and a mere 5 percent by 2029.

The Internet, meanwhile, will take over as the primary banking channel, with the bulk of the activity being initiated through Web-enabled cell phones.

By the end of this decade, 55 percent of transactions, 50 percent of service requests and 45 percent of sales will be initiated online. Twenty years from now, 80 percent of all transactions will be Web-based.

This isn't to say that the branches are going away. Many people over 50 will still want to use them a decade from now, Svigals says, noting that the branch will remain a key channel for initiating sales.

But branches of the future won't need to be nearly as big as branches today because they won't need space for as many teller stations or even a bunch of ATMs.

"Location, location, location will still be vital," Svigals says. "It's the square footage that needs to come down."

These small, more tech-oriented branches could potentially lower overhead, but the reduced foot traffic will also mean less direct interaction with customers—and perhaps fewer cross-selling opportunities.

Sviglas says that's why employees need to be as mobile as their customers and interact with them in "nonbranch settings." As phones get even smarter, they'll also transmit to banks what other products a customer is using or even what language he speaks, allowing banks to better personalize service.

The shift toward on-the-go banking is already happening, of course, but it is expected to accelerate sharply once teens—raised on electronic books, laptops and smartphone applications—become adults and begin buying homes, starting businesses, and generally developing deeper banking relationships.

"Survival as a banker," says Svigals, "will depend on the ability to catch up with emerging customer sets."